Crossborder Factsheet Final

7/28/2019 Crossborder Factsheet Final

1/4

Commodity Futures Trading Commission Office of Public Affairs 202 -418-5080

Commodity Futures Trading CommissionOffice of Public AffairsThree Lafayette Centre1155 21st Street, NWWashington, DC 20581www.cftc.gov

Interpretive Guidance and Policy Statement Regarding Compliance withCertain Swap Regulations

The Commodity Futures Trading Commission (CFTC or Commission) is adopting interpretive guidance and apolicy statement (Guidance) regarding cross-border application of the swaps provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Dodd-Frank Act

The Dodd-Frank Act amended the Commodity Exchange Act (CEA) to establish comprehensive regulation of

swaps by the Commission. Section 722(d) of the Dodd-Frank Act amended the CEA by adding section 2(i), whichprovides that the swaps provisions of the CEA (including any CEA rules or regulations) apply to cross-borderactivities when certain conditions are met, namely, when such activities have a direct and significant connectionwith activities in, or effect on, commerce of the United States or when they contravene Commission rules orregulations as are necessary or appropriate to prevent evasion of the swaps provisions of the CEA enacted underTitle VII of the Dodd-Frank Act. The Guidance sets forth the general policy of the Commission in interpretinghow section 2(i) of the CEA provides for the application of the swaps provisions of the CEA and Commissionregulations to cross-border activities.

U.S. Person Interpretation

The definition of U.S. person is largely territorial-based. The definition would include collective investment vehicles- including hedge funds - that are directly or indirectly majority-owned by U.S. persons, or that have their principalplace of business in the U.S. (focusing principally on location of the investment managers, fund sponsors andpromoters, and the sales and trading desk used by the fund).

A non-U.S. person that is guaranteed by and an affiliate of a U.S. person is not included in the definition of U.S.person.

Swap Dealer De Minimis Threshold and Major Swap Participant (MSP) Calculation

A U.S. person should generally count in its swap dealer de minimis calculations all of its dealing swaps, whetherwith U.S. or non-U.S. counterparties. A non-U.S. person that is a guaranteed or conduit affiliate should alsogenerally include in its swap dealer calculation all of its dealing swaps, whether with U.S. or non-U.S. counterparties.A non-U.S. person that is not a guaranteed or conduit affiliate should generally count swaps with U.S. persons andnon-U.S. persons with may exclude certain dealing swaps, however, including dealing swaps with foreign branchesof U.S. swap dealers, dealing swaps with non-U.S. persons that are not guaranteed affiliates (as well as certain swapswith guaranteed affiliates), and certain swaps entered into anonymously on a registered DCM, SEF, or FBOT.

Commission regulation 1.3(ggg)(4) requires that a person include, in determining whether its swap dealing activitiesexceed the de minimis threshold, the aggregate notional value of swap dealing transactions entered by its affiliatesunder common control. Based on the comments received on the Proposed Guidance and the Further Proposed


2/4


Guidance, and its further review of issues related to the aggregation requirement, the Commissions policy is tointerpret the aggregation requirement in Commission regulation 1.3(ggg)(4) in a manner that applies the sameaggregation principles to all affiliates in a corporate group, whether they are U.S. or non-U.S. persons. Further, theCommission will generally apply the aggregation principle (as articulated in the Final Entities Rules) such that, inconsidering whether a person is engaged in more than a de minimis level of swap dealing, a person (whether U.S. ornon-U.S.) should generally include all relevant dealing swaps of all its U.S. and non-U.S. affiliates under commoncontrol, except that swaps of an affiliate (either U.S. or non-U.S.) that is a registered swap dealer are excluded, asdiscussed below. However, this aspect of the Commissions policy would generally apply only when the aggregate

notional value of applicable swap dealing transactions of all such unregistered U.S. and non-U.S. affiliates of suchregistered swap dealer does not exceed the de minimis level.

Stated in general terms, the Commissions interpretation allows both U.S. persons and non-U.S. persons in anaffiliated group to engage in swap dealing activity up to the de minimis threshold. When the affiliated group meetsthe de minimis threshold in the aggregate, one or more affiliate(s) (inside or outside the United States) wouldgenerally have to register as swap dealer(s) so that the relevant swap dealing activity of the unregistered affiliatesremains below the threshold.

For purposes of determining whether a non-U.S. person holds swap positions above the MSP thresholds, a non-U.S. person should generally include (1) any swap position between it and a U.S. person, (2) any swap between it

and a guaranteed affiliate (but its swap positions where its own obligations thereunder are guaranteed by a U.S.person should be attributed to that U.S. person and not included in the non-U.S. persons determination), and (3)any swap position between another (U.S. or non-U.S.) person and a U.S. person or guaranteed affiliate, where itguarantees the obligations of the other person thereunder. The Guidance provides certain non-U.S. persons withother exceptions.

Transaction-Level and Entity-Level Requirements

The various Dodd-Frank Act swaps provisions applicable to swap dealers and MSPs can be conceptually separatedinto Entity-Level Requirements, which apply to a swap dealer or MSP firm as a whole, and Transaction-LevelRequirements, which apply on a transaction-by-transaction basis.

The Entity-Level Requirements under Title VII of the Dodd-Frank Act and the Commissions regulationspromulgated thereunder relate to: (i) capital adequacy; (ii) chief compliance officer; (iii) risk management; (iv) swapdata recordkeeping; (v) swap data repository reporting (SDR Reporting); and (vi) physical commodity large swapstrader reporting (Large Trader Reporting). The Guidance divides these requirements into two categories. Thefirst category of Entity-Level Requirements includes capital adequacy, chief compliance officer, risk management,and swap data recordkeeping under Commission regulations 23.201 and 23.203 (except certain aspects of swap datarecordkeeping relating to complaints and sales materials) (First Category). The second category of Entity-LevelRequirements includes SDR Reporting, certain aspects of swap data recordkeeping relating to complaints andmarketing and sales materials under Commission regulations 23.201(b)(3) and 23.201(b)(4) and Large TraderReporting (Second Category).

The Transaction-Level Requirements include: (i) required clearing and swap processing; (ii) margining (andsegregation) for uncleared swaps; (iii) mandatory trade execution; (iv) swap trading relationship documentation; (v)portfolio reconciliation and compression; (vi) real-time public reporting; (vii) trade confirmation; (viii) daily tradingrecords; and (ix) external business conduct standards. The Guidance classifies all Transaction-Level Requirementsexcept external business conduct standards as Category A Transaction-Level Requirements, and classifies externalbusiness conduct standards as Category B Transaction-Level Requirements.


3/4


Substituted Compliance

Consistent with CEA section 2(i) and comity principles, the Commissions policy generally is that a non-U.S. swapdealer or MSP may comply with a foreign jurisdictions law and regulations in lieu of compliance with the attendantEntity-Level Requirements and/or Transaction-Level Requirements under the CEA and Commission regulations.

In issuing comparability determinations (which will be based on whether a foreign regimes requirements arecomparable to and as comprehensive as the corollary area(s) of regulatory obligations encompassed by the Entity-

and Transaction-Level Requirements), the Commission will rely upon an outcomes-based approach to determinewhether foreign requirements achieve the same regulatory objectives as the Dodd-Frank Act. The Commissionscomparability determinations may be made on a requirement-by-requirement basis, rather than on the basis of theforeign regime as a whole. The foreign regulations must be comparable and comprehensive but not necessarilyidentical.

Each of the 13 categories of requirementsfive Entity-level, eight Transaction-levelwould be subject to separatedeterminations of substituted compliance.

Application of Entity-Level Requirements and Transaction-Level Requirements

Generally, U.S. swap dealers and U.S. MSPs should comply in full with all of the Entity-Level Requirements,without substituted compliance available. Non-U.S. swap dealers and non-U.S. MSPs should also comply in fullwith all of the Entity-Level Requirements, except that substituted compliance would generally be available forcertain Entity-Level Requirements.

U.S. swap dealers and U.S. MSPs should generally comply in full with Category A Transaction-Level Requirements,but a foreign branch of a U.S. bank that is a swap dealer or an MSP would generally be eligible for substitutedcompliance with respect to Category A Transaction-Level Requirements for swaps with certain counterparties. Inaddition, under certain circumstances, where a swap between the foreign branch of a U.S. swap dealer or U.S. MSPand a non-U.S. person (that is not a guaranteed or conduit affiliate) takes place in a foreign jurisdiction other thanAustralia, Canada, the European Union, Hong Kong, Japan, or Switzerland, the Commissions policy is to interpretCEA section 2(i) so that counterparties may comply with the Transaction-Level Requirements applicable to entities

domiciled or doing business in the foreign jurisdiction where the foreign branch is located, rather than theTransaction-Level Requirements that would otherwise be applicable.

Non-U.S. swap dealers and non-U.S. MSPs should generally comply with Category A Transaction-LevelRequirements for swaps with U.S. persons and with guaranteed or conduit affiliates, but would generally be eligiblefor substituted compliance for swaps with certain counterparties. Where a swap is executed anonymously betweenany non-U.S. person, whether a swap dealer or an MSP, and a U.S. person (or a non-U.S. person that is guaranteedby a U.S. person or conduit affiliate) on a registered DCM or SEF and cleared, the non-U.S. person will beconsidered to have satisfied each of the eight Category A Transaction-Level Requirements that apply to such a swaptransaction as a consequence of being so executed on a DCM or SEF.

Generally, where a swap is with a U.S. swap dealer or U.S. MSP (including an affiliate of a non-U.S. person), theCommissions policy is that the parties to the swap should be subject to the Category B Transaction-LevelRequirements in full, regardless of whether the counterparty is a U.S. person or a non-U.S. person, withoutsubstituted compliance available. On the other hand, where a swap is with a non-U.S. swap dealer or non-U.S. MSP(including an affiliate of a U.S. person), the Commissions policy is that the Category B Transaction-LevelRequirements should apply only if the counterparty to the swap is a U.S. person.


4/4


Application of the CEAs Swap Provisions and Commission Regulations to Market ParticipantsThat are Not Registered As a Swap Dealer or MSP

Five of the CEAs swaps provisions and Commission regulations promulgated thereunder namely, those relatingto required clearing, trade execution, real-time public reporting, Large Trader Reporting, SDR Reporting, and swapdata recordkeeping (collectively, the Non Registrant Requirements)also apply to persons or counterparties otherthan a swap dealer or MSP.

With regard to swaps between two non-registrants where one (or both) of the counterparties to the swap is a U.S.person (including an affiliate of a non-U.S. person), the parties to the swap generally would be expected to complywith the Non-Registrant Requirements. Where both parties are non-U.S. persons, the Non-RegistrantRequirements generally will not apply. Additionally, where both parties to a swap are non-registrants and non-U.S.persons but both are also guaranteed or conduit affiliates, the Non-Registrant Requirements will apply to the swap(although substituted compliance will generally be possible for such requirements).

Crossborder Factsheet Final

Documents

Transcript of Crossborder Factsheet Final